ES2555.U1.PS1.joe.thykattil.spring2013.v3

1 of 38All Rights Reserved 2013 by Pearson Education, ITT, Various Commercial Firms, Universities and Joe Thykattil
Lecture
Economics ES2555
A practical approach to economics
Joe Thykattil
Adjunct Faculty Instructor
Spring 2014
ITT Technical Institute
School of Business
Lecture 1: Intro, Supply & Demand,
Marginal Value, Efficiency

Lecture
Economics – A Lot of Graphs and Math, right?

Lecture
Microeconomics – Expectations of you and me?
First me: I will give you the basics on how to think and incorporate
economics so that you can make better decisions.
You: Participate – speak up and ask questions, especially during
group exercises.

Lecture
Microeconomics – GE273 Syllabus Basics
Please read the full Syllabus for details

Lecture
Microeconomics – GE273
Project – Updated Instructions
Please read the full Syllabus for details
Hints & Tips:
1. Syllabus says that you are a Project Manager giving economic
advice and you and your clients are from a fictional country
named Echovia. For our class, let’s make this country realistic
– Germany.
2. Submit as a PowerPoint slide deck instead of a Word or PDF.
Be ready to present in front of class.
3. Hint: use terms strategically from the class and readings in your
presentation, showing you understand the concepts.
4. Creativity is encouraged.

Lecture
Class Group Case Analysis – Maker’s Mark
Recent news on Makers
Mark attempted to
manipulate the supply
by diluting the alcohol
content.
Good move?
What were the monetary
impacts?
What were the economic
impacts?

Lecture
Class Group Case Analysis – Maker’s Mark
In an attempt to sustain
profits, Makers inflated
the Supply by dilution.
Competitors took advantage
of the situation by
attacking Makers brand
quality.
Customers were feeling that
they received an
inferior product.
Economic Impact: loss of
brand value

Lecture
Maker’s Mark Group Discussion & Presentation
Student name(s): __________________________________
1. What was the issue that Maker’s faced?
1. How did Maker’s respond?
1. What were the response options available to Makers?
1. What should have been Maker’s response?

Lecture
Definition of Economics
Economics is a social science that studies human
behavior and institutional arrangements in
societies that influence the processes by which
relatively scarce resources are allocated to
alternative uses.

Lecture
Microeconomics The study of how
households and firms make choices.
How they interact in market and how
the government attempts to influence
their choices.
Microeconomics and
Macroeconomics
Macroeconomics The study of the
economy as a whole, including topics
such as, inflation, unemployment and
economic growth.
Distinguish between microeconomics
and macroeconomics.
1.4 LEARNING OBJECTIVE

Lecture
Micro versus Macro Economics?

Lecture
When someone asks: How’s the economy?
Micro or Macro?
Generally: People are talking macro, when they talk about
the economy as a whole: unemployment, recession, cost of
living.

Lecture
When someone or a firm asks:
How’s the economy and what products should I produce?
Micro or Macro?
Generally: When a firm is considering what types of products it should produce and at
what price and quantity, they are talking microeconomics.

Lecture
Economics trains you to. . . .
Be mindful about the choices that you make.
Evaluate the cost of individual and social choices.
Examine and understand how certain events and issues are related.
But there is the issue of terminology, some math, and GRAPHS,
GRAPHS AND SOME MORE GRAPHS!

Lecture
Economics: Foundations and Models
We use economics to answer questions such as the following:
• How are the prices of goods and services determined?
• How does pollution affect the economy and how should
government policy deal with these effects?
• Why do firms engage in international trade and how do
government policies affect international trade?
• Why does government control the prices of some goods
and services. What are the effects of those controls?

Lecture
Economic Considerations
What goods and services should an economy produce?
Should the emphasis be on agriculture, manufacturing or
services?
Should it be on sport and leisure or housing?
How should goods and services be produced?
Should they be labour intensive, land intensive, capital
intensive?
Efficiency?
Who should get the goods and services produced?
Should there be even distribution? more for the rich? for
those who work hard?

Lecture
Q
P
Personal Cons
Expenditure
$
Goods
and Services
Households
(Individuals)
$income
$ Expense
Roles:
A. Resource
owners
B. Consumers
Business
Firms
Role:
Producers
hire resource
Resource offered
S
D
Resource hired
Price
Resource
Resource Market
(Mouse Click to advance)(Mouse Click to advance)
N
P
(Mouse Click to advance)
(Mouse Click to Advance)
Our Economic World is Connected - Circular Flow
S
D
Goods and
services
Revenue
$
Mouse click for next slide© L Reynolds, 1999
Q
P
Goods Market

Lecture
Market A group of buyers and sellers of a
good or service and the institution or
arrangement by which they come together to
trade.
Three Key Economic Ideas
Throughout this book, as we study how people make choices
and interact in markets, we will return to three important ideas:
1. People are rational.
2. People respond to economic incentives.
3. Optimal decisions are made at the margin.
Marginal analysis that involves
comparing marginal benefits and
marginal costs.
Explain these three key economic ideas:
People are rational. People respond to
incentives. Optimal decisions are made
at the margin.

Lecture
Classical Economics: People are Rational

Lecture
Futures Markets: How is the Price of Orange Juice
Determined?

Lecture
Determinants of Demand
Market price
Consumer income
Prices of related goods
Tastes
Expectations
What are some examples?

Lecture
Copyright©2003 Southwestern/Thomson Learning
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Demand
Supply
2 Price
ceilingShortage
75
Quantity
supplied
125
Quantity
demanded
Equilibrium
price
$3
Classical Supply & Demand Curve

Lecture
Will Women Have More
Babies if the Government
Pays Them To?
Making
the
Connection
More than 45 countries in
Europe and Asia have taken
steps to try to raise their
birthrates. These policies
suggest that people may
respond to economic
incentives even when
making the very personal
decision of how many
children to have.
YOUR TURN: Test your understanding by doing related problem 1.7 at the end of this chapter.
at the margin.

Lecture
Solved Problem 1-1
Apple Computer Makes a
Decision at the Margin
Should Apple produce an additional 1 million iPhones?
In solving the problem, consider the following:
• Optimal decisions are made at the margin.
• An activity should be continued to the point where
the marginal benefit is equal to the marginal cost.
• In this case, the correct decision requires
information about additional revenue and additional
cost.
YOUR TURN: For more practice, do related problems 1.4, 1.5, and 1.6 at the end of this chapter.
at the margin.

Lecture
Trade-off The idea that because of scarcity,
producing more of one good or service means
producing less of another good or service.
Trade-offs force society to make choices when answering
the following three fundamental questions:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
The Economic Problem That
Every Society Must Solve
Opportunity cost The highest-valued
alternative that must be given up to engage in
an activity.
Discuss how an economy answers these
questions: What goods and services will
be produced? How will the goods and
services be produced? Who will receive
the goods and services produced?

Lecture
Marginal analysis
Marginal benefit = additional benefit resulting from a
one-unit increase in the level of an activity
Marginal cost = additional cost associated with one-unit
increase in the level of an activity

Lecture
MB > MC  expand the activity
MB < MC  contract the activity
optimal level of activity: MB = MC (Net benefit is
maximized at this point)
Marginal analysis

Lecture
Class Group Exercise: Study Time?
Student name(s): __________________________________
4 hours left to study for two exams: economics and calculus, how do
you decide which one to study for and how much you should
study for each one, if at all?
1. Should you study for 2 hours for each exam?
1. Should you study for 4 hours for economics only?
1. Should you not study at all, relax and grab a tv show on Hulu
instead?

Lecture
Centrally planned economy An
economy in which the government
decides how economic resources will
be allocated.
Market economy An economy in
which the decisions of households
and firms interacting in markets
allocate economic resources.
Centrally Planned Economies
versus Market Economies

Lecture
Mixed economy An economy in
which most economic decisions result
from the interaction of buyers and
sellers in markets but in which the
government plays a significant role in
the allocation of resources.
The Modern “Mixed” Economy

Lecture
Productive efficiency A situation in
which a good or service is produced
at the lowest possible cost.
Efficiency and Equity
Allocative efficiency A state of the
economy in which production is in
accordance with consumer
preferences; in particular, every good
or service is produced up to the point
where the last unit provides a
marginal benefit to society equal to
the marginal cost of producing it.

Lecture
Voluntary exchange A situation that
occurs in markets when both the
buyer and seller of a product are
made better off by the transaction.
Efficiency and Equity
Equity The fair distribution of
economic benefits.

Lecture
To develop a model, economists generally follow these steps:
1. Decide on the assumptions to use in developing the
model.
2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain well the economic
data.
5. Retain the revised model to help answer similar economic
questions in the future.
Economic Models Understand the role of models
in economic analysis.

Lecture
Economic models make behavioral
assumptions about the motives of consumers
and firms.
Economic Models
The Role of Assumptions in Economic Models
Economic variable Something measurable
that can have different values, such as the
wages of software programmers.
Forming and Testing Hypotheses in Economic Models
Understand the role of models

Lecture
Positive analysis concerned
with what is.
Economic Models
Normative and Positive Analysis
Normative analysis concerned
with what ought to be.
Don’t Let This Happen to YOU!
Don’t Confuse Positive Analysis with Normative Analysis

Lecture
What is versus what ought to be?

Lecture
Should the Federal Government
Have Increased Restrictions on
the Immigration of Skilled Workers?
Making
the
Connection
Does restricting the immigration of skilled
workers affect the employment
opportunities of recent U.S. graduates?
Like many other policy debates, the
debate over the immigration of skilled
workers has both positive and
normative elements.
The debate over the immigration of
skilled workers demonstrates that
economics is often at the center of
important policy issues.

Lecture
Economic Models
Economics as a Social Science
Because economics studies the actions of
individuals, it is a social science. Economics is
therefore similar to other social science
disciplines, such as psychology, political
science, and sociology. As a social science,
economics considers human behavior—
particularly decision-making behavior—in
every context, not just in the context of
business.

Lecture
Economics Review
Trains you on how to make choices: what you buy and
what you produce due to scarce resources.

Lecture
Economics Review
Use Models to help guide your decision making.
Not Fashion Models Graphical Models

Lecture
Economics Review Quiz
Student name: __________________________________
1. Economic principles guide Apple Computer to:
a. choose if it should enter the mobile phone market.
b. decide on how much money to spend on producing an
iPhone.
c. whether if their employees should stay home for dinner or
eat out.
2. Economic principles guide Maker’s Mark to:
a. dilute, water-down their whiskey.
b. charge more for their whiskey if the supply is less.
c. do nothing is the supply is less.

Lecture
A Preview of Important
Economic Terms
• Entrepreneur
• Innovation
• Technology
• Firm, company, or
business
• Goods
• Services
• Revenue
• Profit
• Household
• Factors of production or
economic resources
• Capital
• Human capital
Become familiar with important
economic terms.

Lecture
Do Immigrants Displace or
Complement Domestic Workers?
AN INSIDE LOOK
at Policy >>
Figure 1 Foreign-Born Scientists and Engineers as
a Percentage of All Scientists and Engineers in the
United States
Figure 2 Foreign Recipients of U.S.
Science and Engineering Doctorates, 1985–
2005

Lecture
Allocative efficiency
Centrally planned economy
Economic model
Economic variable
Economics
Equity
Macroeconomics
Marginal analysis
Market
Market economy
Microeconomics
Mixed economy
Normative analysis
Opportunity cost
Positive analysis
Productive efficiency
Scarcity
Trade-off
Voluntary exchange
KEY TERMS

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